<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
|X| Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the quarterly period ended September 30, 1999
or
|_| Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from ________ to
_________
Commission File Number: 0-12177
BIONOVA HOLDING CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 75-2632242
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
6701 San Pablo Avenue
Oakland, California 94608
(Address of principal executive offices) (Zip Code)
(510) 547-2395
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
As of November 10, 1999, 23,588,031 shares of common stock, par value
$0.01 per share, of Bionova Holding Corporation were outstanding.
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BIONOVA HOLDING CORPORATION
CONSOLIDATED BALANCE SHEET
THOUSANDS OF U.S. DOLLARS
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
--------- ---------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ......................................... $ 6,148 $ 15,405
Accounts receivable ............................................... 25,174 28,220
Advances to growers, net .......................................... 16,525 12,186
Inventories ....................................................... 12,141 16,478
Other current assets .............................................. 1,849 1,763
--------- ---------
Total current assets ......................................... 61,837 74,052
--------- ---------
Property, plant and equipment, net ................................ 39,361 38,611
Patents and trademarks, net ....................................... 15,752 17,025
Goodwill, net ..................................................... 28,665 29,539
Deferred income taxes ............................................. 4,231 4,174
Other assets ...................................................... 20,185 4,285
--------- ---------
Total assets ................................................. $ 170,031 $ 167,686
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term bank loans ............................................. $ 17,585 $ 79,751
Current portion of long-term debt ................................. 1,449 1,558
Accounts payable and accrued expenses ............................. 16,563 26,075
Accounts due to related parties ................................... 6,190 7,396
Deferred income taxes ............................................. 5,315 5,315
--------- ---------
Total current liabilities .................................... 47,102 120,095
Long-term debt .................................................... 103,412 4,225
--------- ---------
Total liabilities ............................................ 150,514 124,320
--------- ---------
Minority interest ................................................. 1,922 1,249
--------- ---------
Stockholders' equity:
Preferred stock, $.01 par value, 5,000 shares authorized, no shares
issued and outstanding .......................................... -- --
Common stock, $.01 par value, 50,000,000 shares authorized,
23,588,031 shares issued and outstanding ........................ 236 236
Additional paid-in capital ........................................ 107,918 107,918
Accumulated deficit ............................................... (90,256) (65,845)
Accumulated other comprehensive income (loss) ..................... (303) (192)
--------- ---------
Total stockholders' equity ........................................ 17,595 42,117
--------- ---------
Total liabilities and stockholders' equity ........................ $ 170,031 $ 167,686
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE>
BIONOVA HOLDING CORPORATION
UNAUDITED CONSOLIDATED STATEMENT OF OPERATIONS
AND COMPREHENSIVE INCOME AND LOSS
THOUSANDS OF U.S. DOLLARS
(EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------ ------------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Total revenues ....................................... $ 51,817 $ 43,915 $ 180,527 $ 191,418
------------ ------------ ------------ ------------
Cost of sales ........................................ 49,351 44,290 168,218 178,187
Selling and administrative expenses .................. 7,754 5,259 21,246 17,265
Research and development expenses .................... 1,666 1,358 4,894 4,159
Amortization of goodwill, patents and trademarks ..... 1,172 730 2,786 2,194
------------ ------------ ------------ ------------
59,943 51,637 197,144 201,805
------------ ------------ ------------ ------------
Operating income (loss) .............................. (8,126) (7,722) (16,617) (10,387)
------------ ------------ ------------ ------------
Interest expense ..................................... (4,735) (2,052) (11,570) (5,640)
Interest income ...................................... 697 348 2,445 854
Exchange gain (loss), net ............................ 903 1,063 853 98
Other non-operating income ........................... 1 58 -- 81
------------ ------------ ------------ ------------
(3,134) (583) (8,272) (4,607)
------------ ------------ ------------ ------------
Income (loss) before income tax ...................... (11,260) (8,305) (24,889) (14,994)
Income tax benefit (expense) ......................... (173) (420) (340) (610)
------------ ------------ ------------ ------------
Net income (loss) before minority interest ........... (11,433) (8,725) (25,229) (15,604)
Minority interest in net loss (income) of subsidiaries 236 485 818 1,324
------------ ------------ ------------ ------------
Net income (loss) .................................... $ (11,197) $ (8,240) $ (24,411) $ (14,280)
Other comprehensive income (expense) net of tax:
Foreign currency translation adjustments ......... (112) 57 (111) 80
------------ ------------ ------------ ------------
Comprehensive income (loss) .......................... $ (11,309) $ (8,183) $ (24,522) $ (14,200)
============ ============ ============ ============
Net income (loss) per share - basic and diluted ...... $ (0.48) $ (0.45) $ (1.04) $ (0.77)
============ ============ ============ ============
Weighted average number of common shares outstanding . 23,588,031 18,370,640 23,588,031 18,370,640
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
BIONOVA HOLDING CORPORATION
UNAUDITED CONSOLIDATED STATEMENT OF CASH FLOWS
THOUSANDS OF U.S. DOLLARS
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-------------------------
1999 1998
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) .............................................. $(24,411) $(14,280)
Items not affecting cash:
Minority interest ............................................ (818) (1,324)
Depreciation ................................................. 3,677 2,947
Amortization of goodwill, patents and trademarks ............. 2,474 2,194
Deferred income taxes ........................................ (57) 24
Loss from sale of property, plant and equipment .............. 17 --
Net changes (exclusive of subsidiaries acquired or divested) in:
Accounts receivable and advances to growers, net ............. 199 807
Inventories .................................................. 4,337 4,468
Accounts payable and accrued expenses ........................ (9,513) (6,786)
Other assets ................................................. (2,586) (1,070)
-------- --------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES ............ (26,680) (13,020)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, plant and equipment ..................... (5,380) (3,899)
Proceeds from divestiture of Van Namen, net of cash divested ... -- 637
Payment for purchase of companies .............................. (349) (476)
-------- --------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES ............ (5,729) (3,738)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in short-term borrowings ............................ (62,275) (11,567)
Net change in long-term borrowings ............................. 99,188 (111)
Accounts due to related parties ................................ (1,206) 26,773
Restricted cash ................................................ (12,555) --
-------- --------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES ............ 23,152 15,095
-------- --------
Net increase (decrease) in cash and cash equivalents ........... (9,257) (1,663)
Cash at beginning of year ...................................... 15,405 6,600
-------- --------
Cash at end of period .......................................... $ 6,148 $ 4,937
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
BIONOVA HOLDING CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
NOTE 1 - BASIS OF PRESENTATION
Bionova Holding Corporation (together with its subsidiaries,
"Bionova Holding" or the "Company"), changed its name on April 28, 1999 from
DNAP Holding Corporation. The Company is a subsidiary of Bionova, S.A. de C.V.,
a Mexican corporation ("Bionova Mexico"), and acts as a holding company for (i)
Agrobionova, S.A. de C.V., of which the Company owns 80% ("ABSA"), (ii)
International Produce Holding Company, of which the Company owns 100% ("IPHC"),
(iii) DNA Plant Technology Corporation, of which the Company owns 100% ("DNAP"),
and (iv) VPP Corporation, of which the Company owns 100% ("VPP").
NOTE 2 - GENERAL
In management's opinion, the accompanying unaudited consolidated
financial statements for Bionova Holding for the three and nine month periods
ended September 30, 1999 and 1998 have been prepared in accordance with
generally accepted accounting principles for interim financial statements and
include all adjustments (consisting only of normal recurring accruals) that the
Company considers necessary for a fair presentation of its financial position,
results of operations, and cash flows for such periods. However, the
accompanying financial statements do not contain all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. All such financial statements are unaudited except the
December 31, 1998 balance sheet. This report and the accompanying unaudited and
audited financial statements should be read in conjunction with the Company's
audited financial statements and notes thereto presented in its 1998 Annual
Report for the fiscal year ended December 31, 1998. Footnotes which would
substantially duplicate disclosures in the Company's audited financial
statements for the fiscal year ended December 31, 1998 contained in the 1998
Annual Report have been omitted. The interim financial information contained
herein is not necessarily indicative of the results to be expected for any other
interim period or the full fiscal year ending December 31, 1999.
NOTE 3 - NET LOSS PER COMMON SHARE
The weighted average number of common shares outstanding during the
three and nine month periods ended September 30, 1999 and 1998 was 23,588,031
and 18,370,640, respectively.
NOTE 4 - INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------- -------
<S> <C> <C>
Finished produce .................... 1,968 2,756
Growing crops ....................... 5,487 8,020
Advances to suppliers ............... 344 299
Spare parts and materials ........... 3,139 3,977
Merchandise in transit and other .... 1,238 1,566
------- -------
12,176 16,618
Allowance for slow moving inventories (35) (140)
------- -------
12,141 16,478
======= =======
</TABLE>
NOTE 5 - FINANCING
On March 22, 1999, the Company issued $100 million of Senior
Guaranteed Floating Rate Notes due 2002. The key provisions of this credit
arrangement consist of (i) a payment of the entire principal
5
<PAGE>
amount on the third anniversary following closing, (ii) prepayments at the
option of the Company with no penalties, (iii) an interest rate of LIBOR plus
7%, (iv) up front fees of $3 million to the lead banks which arranged the
financing, and (v) requirements that the Company must keep one year's worth of
interest in an interest bearing reserve account and that all existing short-term
financing must be paid off with the proceeds of this loan. The contract also
provides that the Company is permitted to obtain up to $30 million in new
financing for working capital purposes. This credit facility is fully guaranteed
by SaVIA, S.A. de C.V. Certain restrictions were placed on the Company with
respect to capital investments, acquisitions, and use of proceeds from asset
sales. While there are no financial covenants in the contract insofar as Bionova
Holding is concerned, SaVIA and some of its affiliates are obligated to meet
certain covenants.
NOTE 6 - RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the
current year presentation.
NOTE 7 - SEGMENT REPORTING
Effective December 31, 1998, the Company adopted FAS 131,
"Disclosures about Segments of an Enterprise and Related Information." The
Company classifies its business into three fundamental areas: FARMING, which
consists principally of interests in 100% Company-owned fresh produce production
facilities and joint ventures with other growers; DISTRIBUTION, consisting
principally of interests in sales and distribution companies in Mexico, the
United States, and Canada; and RESEARCH AND DEVELOPMENT, consisting of business
units focused on the development of fruits and vegetables and intellectual
properties associated with these development efforts.
Information pertaining to the operations of these different business
segments is set forth below. The Company evaluates performance based on several
factors. The most significant financial measure used to evaluate business
performance is business segment operating income. Inter-segment sales are
accounted for at fair value as if the sales were to third parties. Segment
information includes the allocation of corporate overhead to the various
segments, as looked at from the point of view of the segment presidents, and all
acquired goodwill has been pushed down to the companies and segments that have
made the acquisitions.
<TABLE>
<CAPTION>
($000's)
Total of
Research and Reportable
Farming Distribution Development Segments
------- ------------ ----------- --------
<S> <C> <C> <C> <C>
JANUARY 1 - SEPTEMBER 30, 1999
Revenues from unaffiliated customers .. (434) 175,659 5,083 180,308
Inter-segment revenues ................ 42,862 -- -- 42,862
-------- -------- -------- --------
Total revenues ........................ 42,428 175,659 5,083 223,170
======== ======== ======== ========
Operating income (loss) ............... (12,085) (841) (3,691) (16,617)
Depreciation and amortization ......... 3,739 690 1,722 6,151
Identifiable assets at September 30 (1) 73,507 51,250 42,152 166,909
Acquisition of long-lived assets ...... 4,379 1,117 233 5,729
JANUARY 1 - SEPTEMBER 30, 1998
Revenues from unaffiliated customers .. 19 187,284 4,115 191,418
Intersegment transfers ................ 50,017 37 -- 50,054
-------- -------- -------- --------
Total revenues ........................ 50,036 187,321 4,115 241,472
======== ======== ======== ========
Operating income (loss) ............... (8,295) 1,434 (3,526) (10,387)
Depreciation and amortization ......... 2,676 1,153 1,312 5,141
Identifiable assets at September 30 (1) 65,968 41,802 34,429 142,199
Acquisition of long-lived assets ...... 3,331 1,033 11 4,375
</TABLE>
NOTES:
1. IDENTIFIABLE ASSETS for segments are defined as total assets less cash in
banks, deferred income taxes and investment in shares.
6
<PAGE>
Reconciliation of the segments to total consolidated amounts is set
forth below:
<TABLE>
<CAPTION>
($000's)
JANUARY 1 - SEPTEMBER 30
1999 1998
-------- --------
<S> <C> <C>
REVENUES
Total segment revenues ............................... 223,170 241,472
Other non-segment revenues ........................... 219 --
Eliminations of inter-segment revenues ............... (42,862) (50,054)
-------- --------
Consolidated revenues ................................ 180,527 191,418
======== ========
INCOME BEFORE TAXES
Total operating income (loss) from reportable segments (16,617) (10,387)
Interest, net ........................................ (9,125) (4,705)
Exchange gain (loss) ................................. 853 98
-------- --------
Consolidated income (loss) before taxes .................. (24,889) (14,994)
======== ========
ASSETS
Total segment identifiable assets .................... 166,909 142,199
Unallocated and corporate assets (1) ................. 30,427 9,757
Eliminations (2) ..................................... (27,305) (20,699)
-------- --------
Consolidated assets .................................. 170,031 131,257
======== ========
</TABLE>
NOTES:
1. Includes Bionova Holding's and segments' cash in banks, deferred income taxes
and other corporate assets.
2. Consists principally of inter-segment intercompany balances.
Revenue from external customers by product / service category is set
forth below:
<TABLE>
<CAPTION>
($000's)
Total of
Research and Reportable
Farming Distribution Development Segments
------- ------------ ----------- --------
<S> <C> <C> <C> <C>
JANUARY 1 - SEPTEMBER 30, 1999
Core vegetables (1)...................... 90,574 90,574
Fruits and other fresh produce (2)....... (434) 85,085 84,651
Contracted R&D revenue................... 4,382 4,382
Licensed technology and royalties........ 701 701
JANUARY 1 - SEPTEMBER 30, 1998
Core vegetables (1)...................... 93,612 93,612
Fruits and other fresh produce (2)....... 19 93,672 93,691
Contracted R&D revenue................... 3,015 3,015
Licensed technology and royalties........ 1,100 1,100
</TABLE>
NOTES:
1. Core vegetables include tomatoes, bell peppers and cucumbers.
2. Fruits and other fresh produce include papayas, mangoes, grapes, melons,
watermelons and others.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE COMPANY
Bionova Holding Corporation (formerly known as DNAP Holding
Corporation), a Delaware corporation (together with its subsidiaries, unless the
context requires otherwise, "Bionova Holding" or the "Company"), was formed in
January 1996, and acts as a holding company for (i) Agrobionova, S.A. de C.V., a
corporation organized under the laws of the United Mexican States, of which the
Company owns 80% ("ABSA"), (ii) International Produce Holding Company, a
Delaware corporation, of which the Company owns 100% ("IPHC"), (iii) DNA Plant
Technology Corporation, a Delaware corporation, of which the Company owns 100%
("DNAP"), and (iv) VPP Corporation, a Delaware corporation, of which the Company
owns 100% ("VPP"). Since October 6, 1998, approximately 76.6% of the outstanding
common stock of the Company has been indirectly owned by SaVIA, S.A. de C.V.
The Company classifies its business into three fundamental business
segments. The FARMING segment consists principally of ABSA's interests in 100%
Company-owned fresh produce production facilities and joint ventures with other
growers. The DISTRIBUTION segment consists of Interfruver de Mexico, S.A. de
C.V. ("Interfruver"), which engages in the business of marketing and
distributing fresh produce in Mexico, FreshWorld Farms, Inc., which sells and
distributes fresh produce in the eastern United States, and IPHC, which owns
total or majority interests in sales and distribution companies in the United
States and Canada. The RESEARCH AND DEVELOPMENT segment consists of DNAP and
VPP, two companies which are focused on the development and application of
genetic engineering and transformation technologies to fruits and vegetables and
the intellectual properties associated with these development efforts.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 1998
Consolidated total revenues increased by 18% from $43.9 million in
the third quarter of 1998 to $51.8 million in the third quarter of 1999.
Consolidated gross profit (revenues less cost of sales) was a loss of $0.4
million for the third quarter of 1998, as compared with a profit of $2.5 million
for the third quarter 1999. The Company's consolidated operating loss increased
from $7.7 million in the third quarter of 1998 to $8.1 million in the third
quarter of 1999.
FARMING segment revenues, the majority of which are eliminated in
consolidation, declined from $14.6 million in the third quarter of 1998 to
$10.3 million in the third quarter of 1999 due to the elimination and scale
down of four of ABSA's joint ventures. The very heavy production of tomatoes
in California kept prices very low throughout the summer. Poor weather
conditions also affected the quality and yields of ABSA's joint ventures.
These factors, in conjunction with the write down of receivables associated
with the termination of the four joint ventures caused the loss at the gross
profit line and the operating loss of the Farming segment to increase from
$2.9 million and $4.2 million, respectively, in the third quarter of 1998 to
$4.2 million and $5.6 million, respectively, in the third quarter of 1999.
Revenues of the DISTRIBUTION segment increased from $43.2 million in
the third quarter of 1998 to $50.2 million in the third quarter of 1999. As has
been the case throughout this year, production volumes from the Company's
farming operations fell short of forecast and were below those of the third
quarter a year ago. Despite this, Bionova's distribution companies, in the
aggregate, turned in a strong performance in the third quarter due to the
companies' continuing efforts to develop new grower relationships and source
product from outside of the company's farming operations. Several of the
companies turned in particularly strong performances, including Premier Fruits
and Vegetables in Montreal, which achieved a 50% increase in this year's third
quarter versus a year ago, and Interfruver in Mexico and R.B. Packing of
California, both of which achieved increases of 14% from the third quarter of
1998 to the same quarter in 1999. As a result, the Distribution segment, which
got off to a very difficult start this year due to the significant shortfalls in
production during the first quarter, closed the revenue gap versus prior year
from 16% at the end of the first quarter to 7% at the end of the third quarter.
8
<PAGE>
Aggressive efforts launched earlier this year to improve margins in
the Distribution segment continued to show positive results. Distribution gross
margins increased from $1.3 million in the third quarter of 1998 to $4.2 million
in the third quarter of 1999, and as a percent of sales from 3.0% to 8.5%,
respectively. The operating loss of the Distribution segment was $1.5 million in
both the third quarters of 1998 and 1999, as higher sales and administrative
expenses in the third quarter of 1999 resulting from the addition of new sales
and marketing staff recruited to support sales expansion programs and a higher
level of corporate overhead expense allocated to the segment offset the
improved gross margins achieved in the third quarter of 1999.
Revenues of the RESEARCH AND DEVELOPMENT segment increased from $0.9
million in the third quarter of 1998 to $2.2 million in the third quarter of
1999. This increase was due to the recognition of additional contract revenues
stemming from the long-term funded research agreement with SaVIA signed at the
time of the Merger in 1996. SaVIA was obligated to fund DNAP at least $9 million
over the three year period that ended on September 30, 1999. The research
activity on behalf of Seminis, a subsidiary of SaVIA had accounted for $7.5
million of this obligation over the three year period. To fulfill the balance of
this obligation SaVIA funded additional activities during this year's third
quarter that are not likely to be continued. This increase in revenues
translated directly to higher gross profit generation in this segment of the
business. Research expenses were $0.3 million higher, and amortization of
patents and trademarks increased by $0.1 million in the third quarter of 1999 as
compared with the same quarter of 1998 due to the continuing scale up of the
Company's strawberry program. This combination of factors caused the Research
and Development segment to experience an operating loss of $1.0 million in the
third quarter of 1999, which was $0.9 million lower than the same quarter a year
ago.
Interest expense increased to $4.7 million in the third quarter of
1999 from $2.1 million in the same quarter of 1998. This $2.6 million increase
was due to a higher overall level of debt outstanding and the higher interest
rates and amortization of the long-term debt issuance costs associated with the
Senior Guaranteed Floating Rate Notes issued on March 22nd of this year.
Interest income increased $0.3 million for the third quarter of 1999
from the same quarter of 1998. This increase was due primarily to higher grower
receivables and interest rates being charged on this grower financing in both
the Farming and Distribution segments and interest earned on the restricted
interest reserve account.
In the third quarter of 1999 the Company experienced a foreign
exchange gain of $0.9 million as compared to a foreign exchange gain of $1.1
million in the same period of 1998. While not impacting 1999 results
significantly because the Mexican peso has strengthened from its closing
exchange rate on December 31, 1998, a major change that could affect comparisons
year-on-year in the future is that as of January 1, 1999, Mexico ceased to be
considered a highly inflationary economy. Interfruver, whose functional currency
is the peso, will now account for foreign exchange impacts on non-monetary
balance sheet accounts as changes to the cumulative translation account under
shareholders equity rather than as foreign exchange gains and losses on the
consolidated statement of operations.
During the third quarter of 1999, the share of losses allocable to
minority interests was $0.2 million as compared to $0.5 million in the same
quarter of 1998. The 1999 and 1998 allocations of losses are consistent with the
minority positions held across the operating subsidiaries of the Company.
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THE NINE MONTHS ENDED
SEPTEMBER 30, 1998
Consolidated total revenues, gross profit (revenues less cost of
sales), and the Company's consolidated operating loss were $180.5 million, $12.3
million, and $16.6 million, respectively, in the first nine months of 1999 as
compared with $191.4 million, $13.2 million, and $10.4 million for the same
period in 1998.
FARMING segment revenues, the majority of which are eliminated in
consolidation, for the nine months ended September 30, 1999 were $42.4 million
as compared with $50.0 million during the same period in 1998. Sales volumes
declined by 20%, which was a direct consequence of low production stemming from
the unusually cold weather conditions that prevailed in the state of Sinaloa,
Mexico from
9
<PAGE>
December 1998 through April 1999 and heavy rains throughout Mexico during the
summer months. These conditions served to offset the significant efforts
undertaken by ABSA to reduce costs and improve the growing and packing
operations across ABSA's production regions. Weighted average prices were
slightly higher during the first nine months of 1999, offsetting to some extent
the impact of the low sales volumes. Farming segment gross profit declined by
$3.4 million and the operating loss increased from $8.3 million to $12.1 million
for the first nine months of 1998 to the same period in 1999. The decline in
gross margin stemmed from the poor production output in 1999, which increased
average unit production costs and the write down of receivables associated with
the termination of four of ABSA's joint ventures. ABSA's administrative expenses
increased slightly for the first nine months of 1999 as compared with the same
period in 1998 due to higher salary and wage costs, which were consistent with
the rate of inflation in Mexico during the past year. The Company continues to
believe it can achieve 10-15% operating margins in its wholly-owned operations
in Sinaloa, Hermosillo, and Baja California Sur and in its joint venture growing
operations in Baja California Norte in the future with a return of more normal
weather conditions. However, the Company has determined that a better pricing
environment and/or a significant lowering of costs will be required to achieve
these same margins in its Culiacan, Sinaloa growing operations.
DISTRIBUTION segment revenues declined from $187.3 million for the
nine months ended September 30, 1998 to $175.7 million for same period of 1999.
This decrease in revenues of $11.6 million was due to the low volumes and
quality of products produced in Culiacan during the first half of the year
resulting from cold weather conditions and the discontinuation of a FreshWorld
Farms Florida grower, which generated very little income for the company.
Revenues in the Company's other U.S., Canadian, and Mexican distribution
operations increased by $11.6 million for the first nine months of 1999 as
compared with the same period in 1998. These gains were achieved through strong
efforts to develop new grower relationships and source product from outside of
the Company's farming operations. Gross profit (sales less cost of sales) of the
Distribution segment increased by $1.5 million for the first nine months of 1999
as compared with the same period in 1998 due to improved performances by Premier
Fruits and Vegetables in Montreal, Interfruver in Mexico, and Bionova Produce,
Inc. of Arizona. Operating income of the Distribution segment for the nine
months ended September 30, 1999 declined by $2.3 million from the same period in
1998 due to higher selling and administrative expenses associated with the
addition of new sales and marketing staff recruited for the sales expansion
programs, upgrades to the Company's management information systems, and a higher
level of corporate overhead expense allocated to the segment. While the 1999
results to date reflected a 0.6% operating loss on sales, the Company believes
it can achieve at least a 2.5-3.0% operating margin in this segment of the
business in the year 2000 by increasing volumes and thereby leveraging its
existing infrastructure, and by making its FreshWorld Farms operation
profitable.
Revenues and gross profit for the RESEARCH AND DEVELOPMENT segment
increased by $1.0 million for the first nine months of 1999 as compared with the
same period in 1998. This increase was due to the recognition of additional
contract revenues stemming from the long-term funded research agreement with
SaVIA signed at the time of the Merger in 1996. SaVIA was obligated to fund DNAP
at least $9 million over the three year period that ended on September 30, 1999.
The research activity on behalf of Seminis, a subsidiary of SaVIA had accounted
for $7.5 million of this obligation over the three year period. To fulfill the
balance of this obligation SAVIA funded additional activities during this year's
third quarter that are not likely to be continued. Research and development
expenses increased from $4.2 million for the first nine months of 1998 to $4.9
million for the same period in 1999. These higher expenses were a direct
consequence of the scale up of the Company's strawberry program following the
acquisition of Monsanto's strawberry assets in December 1998. This combination
of factors plus increased amortization expense and overhead allocation caused
the Research and Development segment to experience an operating loss of $3.7
million for the first nine months of 1999, as compared with an operating loss of
$3.5 million for the same period in 1998.
Interest expense for the nine months ended September 30, 1999 was
$11.6 million as compared with $5.6 million in the same period of 1998. This
$6.0 million increase was due to a higher overall level of debt outstanding, the
higher interest rates and amortization of the long-term debt issuance costs
associated with the Senior Guaranteed Floating Rate Notes issued on March 22nd
of this year, and the recognition of the remaining balance of up front fees that
had not previously been amortized on the
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<PAGE>
Company's $30 million one-year credit facility with the Bank of Montreal that
was retired in March of this year.
Interest income increased $1.6 million for the first nine months of
1999 from the same period of 1998. This increase was due primarily to higher
grower receivables and interest rates being charged on this grower financing in
both the Farming and Distribution segments and interest earned on the restricted
interest reserve account.
In the first nine months of 1999 the Company experienced a foreign
exchange gain of $0.9 million as compared to a foreign exchange gain of $0.1
million in 1998 due to gains in the Mexican peso and the Canadian dollar. While
not impacting 1999 results significantly because the Mexican peso has
strengthened from its closing exchange rate on December 31, 1998, a major change
that could affect comparisons year-on-year in the future is that as of January
1, 1999, Mexico ceased to be considered a highly inflationary economy.
Interfruver, whose functional currency is the peso, will now account for foreign
exchange impacts on non-monetary balance sheet accounts as changes to the
cumulative translation account under shareholders equity rather than as foreign
exchange gains and losses on the consolidated statement of operations.
During the first nine months of 1999, the share of losses allocable
to minority interests was $0.8 million as compared to $1.3 million in the same
period of 1998. The 1999 and 1998 allocations of losses are consistent with the
minority positions held across the operating subsidiaries of the Company.
CAPITAL EXPENDITURES
During the first nine months of 1999, the Company made capital
investments of $5.4 million in property, plant and equipment. The majority of
the funds were spent by the Farming segment ($4.0 million) to complete the new
packaging facilities in Culiacan and La Paz, Mexico and to improve housing
facilities for field workers in Culiacan and La Paz. Some new investments also
were made to increase capacity in the Company's distribution operations ($1.1
million).
LIQUIDITY AND CAPITAL RESOURCES
For the nine months ended September 30, 1999, the Company used $26.7
million of cash in operating activities. Cash used in the results of operations
amounted to $19.0 million (i.e., net income, minority interest, depreciation,
and amortization). Working capital requirements increased by $7.7 million during
the first nine months of 1999. Accounts receivable and advances to growers
generated $0.2 million of cash in the nine months of 1999, as $4.3 million of
financing was provided to joint ventures with growers (net of loss accruals) and
customer receivables declined by $4.5 million. Inventories declined by $4.3
million and accounts payable and accrued expenses decreased by $9.5 million,
both of which were consistent with the end of the Culiacan, Baja California and
Hermosillo growing seasons. The $2.7 million cash requirement for other assets
reflected a payment to one of the Company's joint farming ventures towards the
acquisition of new packaging and other equipment in 1999, the prepaid commission
fee on the long term bank loan, and the collection of a collateral receipt for
the import of Chilean product into Mexico.
Cash generated from financing activities during the first nine
months of 1999 was $23.2 million. Bionova Holding issued $100 million of Senior
Guaranteed Floating Rate Notes due 2002. Part of the proceeds from this
long-term debt was used to pay down $65.7 million of short-term bank debt and
$2.2 million of accounts due to related parties. Up front fees of $3.0 million
were paid to the lead banks which arranged this long-term financing. As one of
the conditions of the agreement for the floating rate notes, $12.6 million was
on deposit on March 22, 1999 in trust as an interest reserve account
representing one year's worth of interest on the debt.
Due to the losses incurred during the third quarter the Company's
liquidity and equity positions have continued to deteriorate. Company management
has determined that further capitalization is required to provide the necessary
resources to carry forward its business plan and to address the Company's high
level of debt. During the third quarter the Company held discussions with its
parent company, SaVIA, as
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regards the possible need for financial support over the next year. At this time
SaVIA has not committed to providing supplemental financial support. Management
also reviewed a variety of strategic alternatives and other approaches to
improve the capitalization of the Company during the quarter. This review and
evaluation of alternative courses of action is continuing, and will be reported
as material developments occur.
YEAR 2000 ("Y2K") UPDATE
BACKGROUND
The "Year 2000 Issue" is the result of computer programs that were
written using two digits rather than four to define the applicable year. If the
Company's computer programs with date-sensitive functions are not Year 2000
compliant, they may recognize a date using "00" as the Year 1900 rather than the
Year 2000. This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions, send invoices or engage in similar normal business
as material developments occur.
THE PROJECT
The Company's Y2K project includes both information technology
("IT") and non-IT systems and has been divided into four principal sections.
These sections are (1) hardware, (2) software, (3) non-IT systems, and (4) third
parties (suppliers, customers, and other). Sections 1, 2, and 3 have, or will go
through seven phases, as follows: (i) an inventory of all items relevant to Y2K,
(ii) assignment of priorities regarding each of these items for the Company's
activities in the Y2K, (iii) determination of the Company's current Y2K
capability and compliance with regard to each of these items, (iv) preliminary
testing of Y2K capability, (v) maintenance and or replacement of items that fail
to meet Y2K requirements, (vi) validation that maintenance and replacement
changes meet Y2K requirements, and (vii) design of contingency plans
In Bionova Holding's last 10-Q for the quarter ending June 30,
1999 the Company stated that Bionova Holding and all of its subsidiaries had
completed all of the sections of this project with the exceptions of ABSA,
Bionova Produce, Inc. of Arizona and Texas, and R.B. Packing of California,
Inc. Since that time ABSA has completed the update of all of its operating
systems to be Y2K compliant and has received assurances from all of its
vendors that they are Y2k compliant. ABSA's remaining concern is that of
border crossings of materials it requires from the United States into Mexico
when the new year begins. ABSA has developed contingency plans to assure
sufficient packing and other materials are on hand at its packing facilities
in Mexico to protect against possible shortages developing if border
crossings are slowed down for a short period of time. Bionova Produce, Inc.
of Arizona and Texas installed an entirely new set of operating and
accounting systems during the month of October, and while the company is
still in the process of fine tuning these systems, is operating successfully
with them as of this date and is now Y2K compliant. R.B. Packing of
California, its sister company, expects to complete the installation of this
same system by the first week of December and thereby achieve Y2K compliance.
As a backup, R.B. Packing of California has purchased a "patch" for its
current operating and accounting systems that still must be tested, but for
which the vendor has given the company assurance that this patch provides the
necessary changes so the systems will be Y2K compliant.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This report on Form 10-Q includes "forward-looking" statements within
the meaning of Section 27A of the Securities Act of 1933, and Section 21E of the
Securities Exchange Act of 1934. All statements, including without limitation
statements contained in this "Management's Discussion and Analysis of Financial
Condition and Results of Operations" other than statements of historical facts
included in this Form 10-Q, including statements regarding our financial
position, business strategy, prospects, plans and objectives of our management
for future operations, and industry conditions, are forward-looking statements.
Although we believe that the expectations reflected in these forward-looking
statements are reasonable, we can give you no assurance that these expectations
will prove to be correct. In addition to important factors described elsewhere
in this report, the following "Risk Factors," sometimes have affected, and in
the future could affect, our actual results and could cause these results during
1999,
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and beyond, to differ materially from those expressed in any forward-looking
statements made by us or on our behalf. When we use the terms "Bionova," "we,"
"us," and "our," these terms refer to the Company and its subsidiaries.
RISKS RELATING TO OUR FINANCIAL CONDITION
WE MAY CONTINUE TO SUSTAIN LOSSES AND ACCUMULATE DEFICITS IN THE FUTURE
We have sustained losses in 1996, 1997 and 1998. As of September 30,
1999 our accumulated deficit was $90.3 million. For the quarter ended September
30, 1999, we had a net loss of $11.3 million. The factors that caused these
losses, including factors described in this section, may continue to limit our
ability to make a profit in the future.
WE MAY NEED ADDITIONAL FINANCING TO ACHIEVE OUR GROWTH AND TECHNOLOGY
OBJECTIVES, WHICH COULD HURT OUR FINANCIAL CONDITION
We may need additional capital to meet our growth objectives,
working capital requirements, and to fund the purchase and development of new
technologies. Our projected cash flows from operations and existing capital
resources, including our existing credit lines, may not be sufficient.
Therefore, our ability to pursue these objectives may depend on our ability to
obtain additional capital, which could cause us to incur additional debt or
issue additional equity securities. We cannot assure you that additional capital
will be available on satisfactory terms, if at all, and, as a result, we may be
restricted in our pursuit of future growth and technology strategies.
OUR LEVERAGED POSITION COULD CAUSE US TO BE UNABLE TO MEET OUR CAPITAL NEEDS,
WHICH COULD HURT OUR FINANCIAL CONDITION.
At September 30, 1999 we had $122.4 million of indebtedness and
stockholders equity of $17.6 million. This level of indebtedness may pose
substantial risks to our company and to our stockholders, including the
possibility that we may not generate sufficient cash flow to pay our outstanding
debts. Our level of indebtedness may also adversely affect our ability to incur
additional indebtedness and finance our future operations and capital needs, and
may limit our ability to pursue other business opportunities.
RISKS RELATING TO OUR FARMING AND DISTRIBUTION BUSINESS
BAD WEATHER AND CROP DISEASE CAN AFFECT THE AMOUNT OF PRODUCE WE CAN GROW, WHICH
CAN DECREASE OUR REVENUES AND PROFITABILITY
Weather conditions greatly affect the amount of fresh produce we
bring to market, and, accordingly, the prices we receive for our produce.
Storms, frosts, droughts, and particularly floods, can destroy a crop and less
severe weather conditions, such as excess precipitation, cold weather and heat,
can kill or damage significant portions of a crop. Crop disease and pestilence
can be unpredictable and can have a devastating effect on our crops, rendering
them unsalable and resulting in the loss of all or a portion of the crop for
that harvest season. Even when only a portion of our crops are damaged, the
profits we could have made on the crop will be severely affected because the
costs to plant and cultivate the entire crop will have been incurred although we
may experience low yields or may only be able to sell a portion of our crop.
LABOR SHORTAGES AND UNION ACTIVITY CAN AFFECT OUR ABILITY TO HIRE WORKERS TO
HARVEST AND DISTRIBUTE OUR CROPS, WHICH CAN HURT OUR FINANCIAL CONDITION
The production of fresh produce is heavily dependent upon the
availability of a large labor force to harvest crops. The turnover rate among
the labor force is high due to the strenuous work, long hours, necessary
relocation and relatively low pay. If it becomes necessary to pay more to
attract labor to farm work, our labor costs will increase.
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The Mexican farm work force retained by ABSA is unionized. If the
union attempts to disrupt production and is successful on a large scale, labor
costs will likely increase and work stoppages may be encountered, which would be
particularly damaging in our industry where harvesting crops at peak times and
getting them to market on a timely basis is critical. The majority of fresh
produce is shipped by truck. In the United States and in Mexico, the trucking
industry is largely unionized and therefore susceptible to labor disturbances.
As a result, delivery delays caused by labor disturbances in the trucking
industry or any other reason could limit our ability to get fresh produce to
market before it spoils.
ABSA'S RELIANCE ON LEASES AND PRODUCTION ASSOCIATIONS COULD RESULT IN INCREASED
COSTS, WHICH COULD ADVERSELY AFFECT OUR FINANCIAL RESULTS
ABSA relies on agricultural land leased from others and production
associations with other growers for a large part of its supply. The average term
of these land leases is two years and we expect to renew 100% of these land
leases as they expire. If the other parties to these leases and other
arrangements were to choose not to renew their agreements with ABSA, ABSA would
be required to locate alternate sources of supply and/or land or, in some cases,
to pay increased rents for land. In addition to increased rental rates,
increases in land costs could result from increases in water charges, property
taxes and related expenses.
RISKS RELATING TO OUR SCIENTIFIC RESEARCH AND DEVELOPMENT BUSINESS
GOVERNMENT REGULATION CAN CAUSE DELAYS AND INCREASED COSTS, WHICH DECREASE OUR
REVENUES AND PROFITABILITY
Our subsidiaries' activities in the United States are extensively
regulated by the Food and Drug Administration, the United States Department of
Agriculture, the Environmental Protection Agency, and other federal and state
regulatory agencies in the United States. Similarly, our subsidiaries'
activities in Mexico are extensively regulated by the Secretaria de Agricultura,
Ganaderia y Desarrollo Rural, the Secretaria de Salud, and other federal and
state regulatory agencies in Mexico. Also, our products may require regulatory
approval or notification in the United States or in other countries in which
they are tested, used or sold. The regulatory process may delay research,
development, production, or marketing and require more costly and time-consuming
procedures, and there can be no assurance that requisite regulatory approvals or
registration of our current or future genetically engineered products will be
granted on a timely basis.
IF THE PRODUCTS WE DEVELOP AND MARKET ARE NOT COMMERCIAL SUCCESSES, WE WILL NOT
RECOUP OUR DEVELOPMENT AND PRODUCTION COSTS, WHICH WILL HURT OUR FINANCIAL
CONDITION
We are currently in the early stages of marketing several of our new
products, and there can be no assurance that any of these products will be
successful or will produce significant revenues or profits. In addition, a
number of our product development projects are in the early stages, and these
projects may not be successful. The success of these and future products depends
on many variables, including the ability to produce and make available to the
market consistent, premium quality fruits and vegetables on a year-round basis,
consumers' willingness to pay higher prices for premium quality fruits and
vegetables, and retailers' willingness to carry such fruits and vegetables.
IF THE PUBLIC IS UNWILLING TO ACCEPT GENETICALLY ENGINEERED PRODUCTS, WE WILL
NOT RECOUP OUR DEVELOPMENT AND PRODUCTION COSTS, WHICH WILL HURT OUR FINANCIAL
CONDITION
Our second generation products are being developed through the use
of genetic engineering. The commercial success of these products will depend in
part on public acceptance of the cultivation and consumption of genetically
engineered products. We cannot assure you that these products will gain
sufficient public acceptance to be profitable, even if these products obtain the
required regulatory approvals.
WE MAY NOT BE SUCCESSFUL IN OBTAINING PATENTS, PROTECTING OUR TRADE SECRETS AND
CONDUCTING OUR BUSINESS WITHOUT INFRINGING ON THE RIGHTS OF OTHERS, WHICH COULD
ADVERSELY AFFECT OUR BUSINESS
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Our success depends, in part, on our ability to obtain and enforce
patents, maintain trade secret protection, and conduct our business without
infringing the proprietary rights of others. If others develop competing
technologies and market competing products, our sales could be adversely
affected. If we are not able to maintain our trade secrets or to enforce our
patents, our competitive position could be adversely affected. In addition, we
license technology from third parties. If we cannot maintain these licenses, or
if we cannot obtain licenses to other useful technology on commercially
reasonable terms, our research efforts could be adversely affected.
RISKS RELATING TO OUR INTERNATIONAL OPERATIONS
LEGAL LIMITATIONS COULD AFFECT OUR OWNERSHIP OF RURAL LAND IN MEXICO, WHICH
COULD DECREASE OUR SUPPLY OF PRODUCE CAUSING A DECREASE IN OUR REVENUES AND
PROFITABILITY
ABSA owns a substantial amount of rural land in Mexico, which it
uses to grow fresh fruits and vegetables. Historically, the ownership of rural
land in Mexico has been subject to legal limitations and claims by residents of
rural communities, which in some cases could lead to the owner being forced to
surrender its land. ABSA has been, and continues to be, involved in land dispute
proceedings as part of its ordinary course of business. If ABSA is required to
surrender any of its land, the volume of fresh fruits and vegetables it produces
would decline and adversely affect our profitability. There are currently
pending in Mexico two lawsuits challenging the ownership rights of ABSA to rural
land it owns in Mexico. If both of these lawsuits were decided against ABSA,
ABSA could lose a total of 30% of all the rural land it owns in Mexico.
CURRENCY FLUCTUATIONS AND INFLATION CAN INCREASE THE COST OF OUR PRODUCTS IN THE
UNITED STATES AND ABROAD, WHICH DECREASES OUR REVENUES AND PROFITABILITY
The currency exchange rates in Mexico have historically been
volatile. For example, in December 1994, the Mexican government announced its
intention to float the Mexican peso against the United States dollar and, as a
result, the peso devalued over 40% relative to the dollar during that month.
Since January 1995, the value of the peso has decreased approximately 90%. These
exchange rate fluctuations impact our subsidiaries' business. If the value of
the peso decreases relative to the value of the dollar, then:
1. imports of produce into Mexico for distribution by our Mexican
subsidiary become more expensive in peso terms and therefore
more difficult to sell in the Mexican market; and
2. inflation that generally accompanies reductions in the value
of the peso reduces the purchasing power of Mexican consumers,
which reduces the demand for all products including produce
and, in particular, imported, branded or other premium-quality
produce.
Conversely, if the value of the peso increases relative to the value
of the dollar, Mexican production costs increase in dollar terms, which results
in lower margins or higher prices with respect to produce grown in Mexico and
sold in the United States and Canada.
VOLATILE INTEREST RATES IN MEXICO CAN INCREASE OUR CAPITAL COSTS
Historically, interest rates in Mexico have been volatile,
particularly in times of economic unrest and uncertainty. High interest rates
restrict the availability and raise the cost of capital for our Mexican
subsidiaries and for growers and other Mexican parties with whom we do business,
both for borrowings denominated in pesos and for borrowings denominated in
dollars. Costs of operations for our Mexican subsidiaries are higher as a
result.
TRADE DISPUTES BETWEEN THE UNITED STATES AND MEXICO CAN RESULT IN TARIFFS,
QUOTAS AND BANS ON IMPORTS, INCLUDING OUR PRODUCTS, WHICH CAN HURT OUR FINANCIAL
CONDITION
Despite the enactment of the North American Free Trade Agreement,
Mexico and the United States from time to time are involved in trade disputes.
The United States has, on occasion, imposed tariffs, quotas, and importation
bans on products produced in Mexico. U.S. tomato growers have brought
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dumping claims against Mexican tomato growers and may do so again. Because some
of our subsidiaries produce products in Mexico, which we sell in the United
States, such actions, if taken, could adversely affect our business.
GENERAL BUSINESS RISKS
BIONOVA INTERNATIONAL, INC. HAS SUBSTANTIAL CONTROL OVER OUR COMPANY AND CAN
AFFECT VIRTUALLY ALL DECISIONS MADE BY OUR STOCKHOLDERS
Bionova International beneficially owns 18,076,839 shares of our
common stock accounting for 76.6% of all issued and outstanding shares. As a
result, Bionova International has the requisite voting power to significantly
affect virtually all decisions made by Bionova and our stockholders, including
the power to elect all of our directors and to block corporate actions such as
an amendment to most provisions of our certificate of incorporation. This
ownership and management structure will inhibit the taking of any action by
Bionova which is not acceptable to Bionova International.
WE MAY NOT BE ABLE TO ADAPT OUR MANAGEMENT INFORMATION SYSTEMS AND CONTROLS TO
KEEP PACE WITH OUR FUTURE GROWTH, WHICH COULD HURT OUR FINANCIAL CONDITION
Our business has undergone rapid growth through acquisition of
complementary businesses. In 1996, we acquired DNA Plant Technology and its
subsidiaries. In 1997, we created VPP Corporation to acquire most of the assets
of United Agricorp, Inc. In 1998, we acquired full ownership of ABSA and
International Produce Holding Company, and their subsidiaries. As a result of
these acquisitions, significant strains have been placed on the management,
operations and financial resources of our subsidiaries. The realization of our
business strategy depends on, among other things, our ability to adapt
management information systems and controls and to hire, train and retain
qualified employees to allow these operations to be effectively managed. The
geographic separation of our subsidiaries' operations exacerbates these issues.
OUR OPERATIONS MAY BE SIGNIFICANTLY AFFECTED BY THE YEAR 2000 PROBLEM
The Year 2000 problem refers to errors that may occur as a result of
computers using two digits rather than four digits to define the applicable
year. Software and hardware may recognize a date using "00" as the year 1900,
rather than the year 2000. The failure to identify and/or properly correct a
Year 2000 problem could result in an interruption in, or a failure of certain
normal business activities or operations. Such failures could materially and
adversely affect our ability to process transactions, send invoices, or engage
in other normal business activities. However, our Year 2000 project is virtually
complete, and the final pieces are expected to be in place by the first week of
December 1999. With the completion of this project as scheduled, we believe that
the possibility of significant interruptions of normal business activities and
operations will be reduced.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK
The table below provides information about the Company's derivative
financial instruments and consisting primarily of debt obligations that are
sensitive to changes in interest rates. For debt obligations, the table presents
principal cash flows and related weighted average interest rates by expected
(contractual) maturity dates. Notional amounts are used to calculate the
contractual payments to be exchanged under the contracts. Weighted average
variable rates are based on implied forward rates in the yield curve on December
31, 1998. The information is presented in U.S. dollar equivalents, which is the
Company's reporting currency. The instrument's actual cash flows are denominated
in both U.S. dollars and Mexican pesos, and as of December 31, 1998 are
indicated accordingly in the tables below.
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<TABLE>
<CAPTION>
EXPECTED MATURITY DATE
---------------------------------------------------------------------------------
Fair
1999 2000 2001 2002 2003 Thereafter Total Value
---- ---- ---- ---- ---- ---------- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Short-term debt:
($US Equivalent in millions)
U.S. dollar variable rate.............. $ 79.3 $ 79.3 $ 79.3
Average interest rate................ 12%
Peso variable rate (in $US) 0.5 0.5 0.5
Average interest rate................ 29%
Long-term debt:
U.S. dollar fixed rate................. $ 1.3 $ 3.7 $ 5.0 $ 5.0
Average interest rate................ 10% 10%
U.S. dollar variable rate.............. $ 0.2 $ 0.2 $ 0.3 $ 0.7 $ 0.7
Average interest rate................ 12% 12% 12%
</TABLE>
The Company tries to use the most cost-effective means to fund its
operating and capital needs. Fixed or variable debt will be borrowed in both
U.S. Dollars and Mexican pesos. The Company borrows Mexican pesos to provide for
its working capital needs in its Mexican operations. To minimize exchange risk
associated with the importation of products, the Company will enter into forward
exchange contracts where the functional currency to be used in the transaction
is dollars. At December 31, 1998 approximately 87% of the Company's long-term
debt was fixed rate debt and 13% was variable rate debt. All of the fixed rate
long-term debt is denominated in U.S. dollars. All of the variable rate debt is
denominated in U.S. dollars.
The Company completed a transaction on March 22, 1999 to refinance
its short-term variable rate debt, as discussed in Note 5 to the Financial
Statements for the quarter ended September 30, 1999. As a consequence, there was
a significant restructuring of the Company's financing between short-term and
long-term debt. The following table depicts the impact of this debt
restructuring as of September 30, 1999. At September 30, 1999 approximately 4%
of the Company's long-term debt was fixed rate debt and 96% was variable rate
debt.
<TABLE>
<CAPTION>
EXPECTED MATURITY DATE
----------------------------------------------------------------------------------
Fair
1999 2000 2001 2002 2003 Thereafter Total Value
---- ---- ---- ---- ---- ---------- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Short-term debt:
($US Equivalent in millions)
U.S. dollar variable rate......... $ 17.1 $ 17.1 $ 17.1
Average interest rate........... 10%
Peso variable rate (in $US) 0.5 0.5 0.5
Average interest rate........... 23%
Long-term debt:
U.S. dollar fixed rate............ $ 1.3 $ 2.9 $ 4.2 $ 4.2
Average interest rate........... 10% 10%
U.S. dollar variable rate......... $ 0.1 $ 0.3 $ 0.3 $100.0 $100.7 $100.7
Average interest rate........... 13% 13% 13% 13%
</TABLE>
EXCHANGE RATE RISK
The table below provides information about the Company's financial
instruments by functional currency that is subject to exchange risk. This
information is presented in U.S. dollar equivalents. The table summarizes
information on instruments that are sensitive to foreign currency exchange
rates, including peso-denominated debt obligations. For debt obligations, the
table presents principal cash flows and related weighted average interest rates
by expected maturity dates as of December 31, 1998.
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<PAGE>
<TABLE>
<CAPTION>
EXPECTED MATURITY DATE
---------------------------------------------------------------------------------
Fair
1999 2000 2001 2002 2003 Thereafter Total Value
---- ---- ---- ---- ---- ---------- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
On-Balance sheet
Financial Investments
($US Equivalent in millions)
Peso short-term debt:
Variable rate (in $US).......... $ 0.5 $ 0.5 $ 0.5
Average interest rate........... 23%
Expected maturity or
Transaction date.............. Dec. 31
</TABLE>
The Company had no firmly committed forward sales contracts in
Mexican pesos as of December 31, 1998.
The Company is exposed to U.S. dollar-to-Mexican peso currency
exchange risk due to revenues and costs denominated in Mexican pesos associated
with its Mexican subsidiaries, ABSA and Interfruver. The Company expects it will
continue to be exposed to currency exchange risks in the near future.
The Company's subsidiary, Interfruver, from time to time enters into
foreign exchange forward contracts to manage its exposure to fluctuations in
foreign currency denominated payables. These contracts generally mature within
three months. As of December 31, 1998, the Company did not have any foreign
exchange forward contracts outstanding. Company management believes that these
financial instruments do not subject the Company to material risk due to foreign
exchange movements because gains or losses on these contracts will offset gains
or losses on the assets, liabilities, and transactions being hedged.
COMMODITY PRICE RISK
The table below provides information about the Company's fresh
produce growing crops inventory and fixed price contracts that are sensitive to
changes in commodity prices. For inventory, the table presents the carrying
amount and fair value at December 31, 1998. For the fixed price contracts, the
table presents the notional amounts in Boxes, the weighted average contract
prices, and the total dollar contract amount by expected maturity dates, the
latest of which occurs within one year from the reporting date. Contract amounts
are used to calculate the contractual payments and quantity of fresh produce to
be exchanged under futures contracts.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1998
Carrying Fair
Amount Value
<S> <C> <C>
On-balance sheet commodity position:
Fresh produce crops in process inventory ($US in millions)............ $ 8.0 $ 8.0
Fixed price contracts:
Contract volumes (1,349,100 boxes)
Weighted average unit price (per 1,349,100 boxes)..................... $ 7.62 $ 7.62
Contract amount ($US in millions)..................................... $10.2 $10.2
</TABLE>
In order to manage the exposure to commodity price sensitivity
associated with fresh produce products, the Company enters into fixed price
contracts with certain customers which guarantee specified volumes for the
growing season or the year at a fixed price. The Company believes that its
efforts to assure
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a high level of product quality along with efforts to develop and market
differentiated, added value products also reduce to some extent its exposure to
commodity price sensitivity.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On July 15, 1999, a lawsuit styled LLOYD GLASS V. PHILIP MORRIS
INCORPORATED, ET AL. was filed in the District Court for Clark County, Nevada
against various defendants, including DNAP and several manufacturers of
cigarettes. A similar complaint in a lawsuit styled RANDI C. REYNOLDS, ET AL. V.
PHILIP MORRIS INCORPORATED, ET AL. was filed on October 4, 1999 in the Superior
Court of California, County of Ventura. In both cases, in addition to other
claims brought against the cigarette manufacturers only, the plaintiffs allege
that DNAP engaged in deceit and fraudulent concealment and participated in an
alleged conspiracy among the named cigarette manufacturers to deceive the public
regarding the hazards of smoking. DNAP's involvement in these suits arises from
allegations regarding research it performed for a major tobacco company from
1983 through 1994. In both cases, the plaintiffs are seeking monetary damages
and recovery of lost wages and medical expenses. In addition, the plaintiffs in
the REYNOLDS case are seeking special and punitive damages. DNAP denies any
wrongdoing or liability in these matters and intends to vigorously contest these
lawsuits.
In May, 1999, a lawsuit styled MYRTLE L. PAXTON V. PHILIP MORRIS
INCORPORATED, ET AL. was filed in the Circuit Court of Mercer County, West
Virginia against various defendants, including DNAP and several manufacturers of
cigarettes. In the complaint, the plaintiff asserts numerous claims against the
cigarette manufacturers, including negligence and strict liability with respect
to the sale of cigarettes, deceit and fraudulent concealment, conspiracy, breach
of warranty arising out of cigarette sales, and unfair competition and false
advertising relating to cigarette sales. The plaintiff also asserts all of these
claims against DNAP, but fails to provide any factual basis for claims against
DNAP relating to the sale of cigarettes. DNAP's involvement in this suit arises
from allegations regarding research it performed for a major tobacco company
from 1983 through 1994. The plaintiff is seeking monetary damages and recovery
of lost wages and medical expenses. Proceedings in this case have been stayed.
DNAP denies any wrongdoing or liability in this matter and intends to vigorously
contest this lawsuit.
ITEM 5. OTHER INFORMATION
BIONOVA HOLDING'S LISTING MOVED FROM THE NASDAQ TO THE AMEX
On November 4, 1999 Bionova Holding Corporation's common stock
began trading on the American Stock Exchange. The new symbol on the American
Stock Exchange for the Company is "BVA".
RIGHTS OFFERING
The Company previously announced its intention to implement a rights
offering that would result in the Company distributing to each record holder of
its common stock three rights (each, a "Right") for every four shares of common
stock held by such record holder. Each Right will entitle the holder to purchase
one share of common stock at an exercise price of $5.75 per share and will
expire on May 31, 2000. As stated in the Company's 10-Q for the quarter ended
June 30, 1999, management temporarily deferred implementation of the rights. As
no restructuring proposal has yet been presented, management of the Company has
now determined to proceed to take the necessary steps to issue the Rights as
quickly as possible. This requires that the Company complete its responses to
comments made by the SEC on the Company's S-3 registration statement and other
filings. The Company intends to issue the rights promptly after the registration
statement is declared effective by the SEC.
CONTROLLING STOCKHOLDER; CONFLICTS OF INTEREST
Approximately 76.6% of the outstanding shares of common stock of the
Company are owned of record by Bionova International, Inc., an indirect,
wholly-owned subsidiary of SaVIA. Therefore, SaVIA has the power to elect all of
the Company's board of directors and to determine the outcome of any action
19
<PAGE>
requiring the approval of the holders of the Company's common stock. This
ownership and management structure will inhibit the taking of any action by the
Company which is not acceptable to the controlling stockholder.
Certain of the Company's directors and executive officers are also
currently serving as board members or executive officers of SaVIA or companies
related to SaVIA, and it is expected that each will continue to do so. Such
management interrelationships and intercorporate relationships may lead to
possible conflicts of interest.
The Company and other entities that may be deemed to be controlled
by or affiliated with SaVIA sometimes engage in (i) intercorporate transactions
such as guarantees, management and expense sharing arrangements, shared fee
arrangements, joint ventures, partnerships, loans, options, advances of funds on
open account and sales, leases and exchanges of assets, including securities
issued by both related and unrelated parties and (ii) common investment and
acquisition strategies, business combinations, reorganizations,
recapitalizations, securities repurchases and purchases and sales (and other
acquisitions and dispositions) of subsidiaries, divisions or other business
units, which transactions have involved both related and unrelated parties. The
Company continuously considers, reviews and evaluates, and understands that
SaVIA and related entities consider, review and evaluate, transactions of the
type described above. Depending upon the business, tax and other objectives then
relevant, it is possible that the Company might be a party to one or more of
such transactions in the future in addition to those currently in force, such as
the Long Term Funded Research Agreement dated January 1, 1997 between Seminis
Vegetable Seeds, Inc., an indirect subsidiary of SaVIA, and DNAP. In connection
with these activities the Company might consider issuing additional equity
securities or incurring additional indebtedness. The Company's acquisition
activities may in the future include participation in the acquisition or
restructuring activities conducted by other companies that may be deemed to be
controlled by SaVIA.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 Certificate of Incorporation of the Company (filed as an exhibit to
the Company's Registration Statement on Form S-4 (No. 333-09975) and
incorporated herein by reference).
3.2 Certificate of Amendment to the Certificate of Incorporation of the
Company effective September 26, 1996 (filed as an exhibit to the
Company's quarterly report on Form 10-Q for the quarterly period
ended September 30, 1996 and incorporated herein by reference).
3.3 Certificate of Amendment to the Certificate of Incorporation of the
Company effective April 28, 1999 (filed as an exhibit to the
Company's Quarterly report on Form 10-Q for the quarterly period
ended March 31, 1999 and incorporated herein by reference)
3.4* Bylaws of the Company
4.1* Note Acquisition Agreement dated as of March 22, 1999 among SaVIA,
S.A. de C.V., the Company, the Holders referred to therein, Morgan
Guaranty Trust Company of New York, as Administrative Agent and
Documentation Agent, Bankers Trust Company, as Paying Agent and
Registrar, and Citibank,
N.A., as Collateral Agent.
27.1 Financial Data Schedule
20
<PAGE>
* Filed as an exhibit to the Company's annual report on Form 10-K for
the year ended December 31, 1998 and incorporated herein by
reference.
(b) Reports on Form 8-K
None.
21
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BIONOVA HOLDING CORPORATION
Date: November 14, 1999 By: /s/ ARTHUR H. FINNEL
--------------------------
Arthur H. Finnel,
Executive Vice President,
Treasurer and Chief
Financial Officer
22
<PAGE>
INDEX TO EXHIBITS
(a) Exhibits
3.3 Certificate of Incorporation of the Company (filed as an exhibit to
the Company's Registration Statement on Form S-4 (No. 333-09975) and
incorporated herein by reference).
3.4 Certificate of Amendment to the Certificate of Incorporation of the
Company effective September 26, 1996 (filed as an exhibit to the
Company's quarterly report on Form 10-Q for the quarterly period
ended September 30, 1996 and incorporated herein by reference).
3.3 Certificate of Amendment to the Certificate of Incorporation of the
Company effective April 28, 1999 (filed as an exhibit to the
Company's Quarterly report on Form 10-Q for the quarterly period
ended March 31, 1999 and incorporated herein by reference)
3.4* Bylaws of the Company
4.1* Note Acquisition Agreement dated as of March 22, 1999 among SaVIA,
S.A. de C.V., the Company, the Holders referred to therein, Morgan
Guaranty Trust Company of New York, as Administrative Agent and
Documentation Agent, Bankers Trust Company, as Paying Agent and
Registrar, and Citibank,
N.A., as Collateral Agent.
27.1 Financial Data Schedule
----------
* Filed as an exhibit to the Company's annual report on Form 10-K for
the year ended December 31, 1998 and incorporated herein by
reference.
23
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL DATA EXTRACTED FROM THE COMPANY'S
FINANCIAL STATEMENTS AT AND FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 1999
INCLUDED IN THE COMPANY'S FORM 10-Q QUARTERLY REPORT FOR SUCH PERIOD AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 6,148
<SECURITIES> 0
<RECEIVABLES> 46,591
<ALLOWANCES> 4,892
<INVENTORY> 12,141
<CURRENT-ASSETS> 61,837
<PP&E> 54,695
<DEPRECIATION> 15,334
<TOTAL-ASSETS> 170,031
<CURRENT-LIABILITIES> 47,102
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0
0
<COMMON> 236
<OTHER-SE> 17,359
<TOTAL-LIABILITY-AND-EQUITY> 170,031
<SALES> 180,527
<TOTAL-REVENUES> 180,527
<CGS> 168,218
<TOTAL-COSTS> 197,144
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11,570
<INCOME-PRETAX> (24,889)
<INCOME-TAX> 340
<INCOME-CONTINUING> (25,229)
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<NET-INCOME> (24,411)
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